Budget 2016: National Pension Scheme – 40% of withdrawal made tax free!

Published: February 29, 2016 at 12:37 pm

Last Updated on

The finance minister today announced 40% of the lump sum withdrawn from the National Pension Scheme will be made tax-free. A look at the implications of this move and if it makes the NPS more attractive.

The government has done this to ensure tax uniformity between defined benefits (GPF) and defined contributions schemes (NPS). It has now made EPF Contributions from April 2016 taxable!

Note: My understanding: GPF rules remain the same. It continues to be tax-free. By the same token, Govt NPS corpus should also tax-free (official clarification awaited though)

Links for EPF subscribers:

 

Here is full budget speech

Assuming other rules remain the same,

  • 40% of corpus is tax-free (Budget 2016 recommendation) upon withdrawal.
  • rest will be taxed as per slab when withdrawn or can be annuitized (the 40% min annuity recommendation appears to be removed. Require confirmation)

NPS rules:

All Contributions + interest –> 40% EEE + 60% EET (both investment and interest tax free)

Does this make the NPS attractive now?

If you do not mind the lock-in up to age 60 (80% has to be annuitized if withdrawn before) then NPS was always attractive*. Now even more so!

I suggest you use the NPS for your debt component and use stocks and/equity mutual funds for your equity allocation.  You can choose the ‘C‘ option – low duration corporate/bank/psu bonds. Avoid the ‘G‘ option – long-term gilts.

Read more to Ddecide on the asset allocation for a financial goal

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* Beware: The concept of a locked-in retirement corpus can be quite dangerous.

If the lock-in does not appeal to you stay away from NPS. Personally, I hate lock-in and standby what I wrote earlier:

Remember: NPS investments are mutual fund investments!

Pension is not guaranteed! Returns are not guaranteed! The annuity has to be purchased from an insurer. All you need is money to purchase the annuity. Not NPS! You can get them from anywhere!

Updates 

Should I Now Switch to the National Pension Scheme (NPS)?

EPF Calculator with Budget 2016 Taxation Rules

Budget 2016: Don’t worry -Tax on EPF is quite small!

If you are an existing subscriber, this is great news. Do not invest in NPS because of this announcement.  It ought to be clear enough now that the government cannot make the entire withdrawal tax-free!

Read more: Budget 2016: What should we do now?

PS. This is terrific news for government employees!

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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15 Comments

  1. I am investing in epf since 2005.. so in this case, all the contribution made before April 2016 is tax free and future contributions after April 2016 are taxable. is it like this? bit confused… 🙁
    Please clarify.
    Thanks!

  2. It is more horrendous and nonsense budget proposal.
    1. 40% withdrawal is tax free against 100% earlier in case of EPF and PPF. (don’t look at only NPS withdrawal rules). Rules have been amended for other categories as well.
    2. For balance 60% either you pay complete marginal tax of 30% or compulsorily purchase an annuity – which is also taxable every year as per your annuity payment.
    These proposals are horrendous and completely middle income salaried class unfriendly and should be fought at various forums and should be reversed.
    This Govt seems hell bent on reducing the take home pay of salaried class people by taxing it through various ways and means.

  3. 80CCD(1B) 50000 extra whose contribution?

    Is it employee or employer. I assume it is employee and tire 1 account.

    Over and above 1.50 lacs. Am I right?

  4. Sir, Need your advice on NPS.
    Should I invest 50k in NPS to save tax.
    I am in 20% tax bracket at the moment. I am an average performer. SO may not reach 30% bracket in future too. Because even though salary would increase in future, but so would the slabs.
    I will not buy annuity on retirement, so I will pay the tax on the remaining 60% (40% is taxfree). I am prepared for lockin till retirement as I would not need the money till then. I would choose C or G option and not E. My returns expectation from NPS is that of a debt instrument. So vis-a-vis PPF,EPF, taxfree bonds, debt mutual funds, does it STILL make sense for me to invest the 50k in NPS. Please respond fast, as I will need to invest in NPS in next couple of days, as the proof needs to be submitted to employer. I am NOT an existing NPS investor.

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